Tax Effects

Under the historical 'tax payable method', income tax cannot be measured reliably and accurately. For example, a corporation is likely to use straight-line depreciation on its income statement, but will use accelerated depreciation on its income tax return. Thus, accounting profit is not equal to taxation profit.

Under AASB 112, the tax-effect method focuses on the differences between an entity's statements of financial balance sheet which is determined in accordance with accounting standards and principles of accrual accounting and its tax-based balance sheet prepared in accordance with income tax legislation by following the cash flow.

Therefore, entity may have current tax effect which gives rise to a current liability for income tax expense or future tax consequences which will defer the entity's income tax payment to a future date. Due to these reasons, the company's income tax expense is not equal merely to the company's current tax liability.

Finally, the tax-effect method complies with IFRS since its tax-based balance sheet is prepared in accordance with income tax legislation by following cash flow which complies with IFRS.

Under AASB 127, a non-controlling interest (NCI) is recognised as an equity contributor to the group, other than a liability of the group. This is because NCI does not meet the definition of a liability, and therefore it is better defined as equity rather than liability because the subsidiary has no present obligation to provide economic outflows to the NCI.

Besides, the NCI is entitled to a share of consolidated equity, because it is a contributor of equity to the consolidated group, not the subsidiary. Because consolidated equity is affected by profits and losses made in relation to transactions within the group, the calculation of the NCI is affected by the existence of intra-group transaction, which takes the adjustments for intra-group transactions into consideration.

Consequently, since NCI is a share of equity held by the group which contributes to the consolidated equity and its calculation is in the context of entity consolidation, the company's accountant is required to measure the equity of non-controlling interest based on a share of consolidated equity rather than on a share of recorded equity of the subsidiary in which the non-controlling equity ownership is held.